On November 1, 2018, the Hon’ble Supreme Court of India passed a judgment in Hindon Forge Private Limited v. The State of Uttar Pradesh (Civil Appeal No. 10873 of 2018) setting aside a judgment dated February 6, 2018, passed by a Full Bench of the Hon’ble High Court of Allahabad. The case was referred to a Full Bench of the High Court of Allahabad by an order of reference of a Single Judge who noticed divergent opinions expressed by two different Benches of the Allahabad High Court on the question whether an application under Section 17(1) of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARAESI Act”), at the instance of a borrower, is maintainable even before physical or actual possession of the secured assets is taken by the secured creditor in exercise of their powers under Section 13(4) of the SARFAESI Act read with Rule 8 of the Security Interest (Enforcement) Rules, 2002 (“2002 Rules”).  

The High Court of Allahabad in its judgment, inter alia, held that (i) an application under Section 17(1) of the SARFAESI Act is maintainable only when a  borrower loses physical possession of the secured assets; (ii) a borrower is not entitled to challenge the measure(s) proposed to be taken by a secured creditor under Section 13(4) of the SARFAESI Act, unless his / her right to approach the Debts Recovery Tribunal, as provided for under Section 17(1) of the SARFAESI Act, matures; (iii) the scheme of provisions of Sections 13 and 17 would show that the “measure” taken under Section 13(4)(a) read with Rule 8 would not be complete unless actual physical possession of the secured assets is taken by the secured creditor. The transfer of possession, the Court held, is an action and a mere declaration of possession, by a notice, in itself, cannot amount to transfer of possession, more particularly when such a notice meets with resistance. It was further observed that in a securitization application under Section 17(1) of the SARFAESI Act, the borrower is required to make a categoric statement that he / she lost possession or has been dispossessed and pray for possession; and (iv) a borrower is granted all the opportunities, at different stages, either to clear the dues or to challenge the measure(s) under Section 13(4) of the SARFAESI Act or even to challenge the reasons rejecting his objections, after the measures under Section 13(4) have been taken.  

The question before the Supreme Court was, therefore, whether the scope of the expression “possession” under Section 13(4) of the SARFAESI Act, includes both, symbolic and physical possession or only refers to physical possession? This question arose in light of the undisputed fact that a borrower is entitled to approach the Debts Recovery Tribunal once possession is taken under Section 17(1) of the SARFAESI Act.

Supreme Court’s observations and findings:

1. The Supreme Court held that a borrower can approach the Debts Recovery Tribunal under Section 17 of the SARFAESI Act at the stage of possession notice, as stipulated under Rules 8(1) and 8(2) of the 2002 Rules.  

2. It was observed that the object of the SARFAESI Act, as set out in the Statement of Objects and Reasons, is to, inter alia, enable a borrower to approach a quasi-judicial forum in case the secured creditor, while taking any of the measures under Section 13(4) of the SARFAESI Act, does not adhere to the provisions of the SARFAESI Act. In this regard, the Supreme Court, while drawing an example, stated that “in the event a secured creditor takes possession under Rules 8(1) and 8(2) of the 2002 Rules before the 60 (sixty) days’ period prescribed under section 13(2) is over. The borrower does not have to wait until actual physical possession is taken (this may never happen as after possession is taken under rule 8(1) and 8(2), the secured creditor may go ahead and sell the asset). The object of providing a remedy against the wrongful action of a secured creditor to a borrower will be stultified if the borrower has to wait until a sale notice is issued, or worse still, until a sale actually takes place. It is clear, therefore, that one of the objects of the Act, as carried out by rule 8(1) and 8(2) must also be subserved, namely, to provide the borrower with instant recourse to a quasi-judicial body in case of wrongful action taken by the secured creditor.”  

3. The Supreme Court further held that Rule 8(3) of the 2002 Rules starts with the expression “in the event of”, which makes it clear that apart from possession under Rules 8(1) and 8(2) of the 2002 Rules, possession may be taken under Rule 8(3) as well. In view of this, whether possession is taken under Rules 8(1), 8(2) or 8(3), these measures are taken by the secured creditor under Section 13(4) of the SARFAESI Act for the purpose of attracting Section 17(1).

4. A perusal of Section 13(6) of the SARFAESI Act, the Supreme Court observed, makes it clear that statutorily, though only the lesser right of taking possession (viz. symbolic or physical) has taken place, yet the secured creditor may, by lease, sale or assignment, vest in the lessee or purchaser, all rights in the secured assets as if the transfer has been made by the original owner of such secured asset(s). The Supreme Court, in this regard, affirmed that a secured creditor remains a secured creditor even after possession is taken as the fiction stipulated in Section 13(6) of the SARFAESI Act does not convert the secured creditor into the owner of the asset, but merely vests complete title in the transferee of the asset once the transfer occurs in accordance with Rules 8 and 9 of the 2002 Rules.   

5. The Supreme Court also observed that Appendix IV-A (inserted by an amendment to Rule 8 of the 2002 Rules on October 17, 2008), throws light on and recognizes the fact that, Rules 8(1) and 8(2) of the 2002 Rules refer to symbolic possession whereas Rule 8(3) refers to physical possession.  

6. In view of this, the Supreme Court (i) set aside the judgment dated February 6, 2018, passed by a Full Bench of the High Court of Allahabad; and (ii) held that a borrower can approach the Debts Recovery Tribunal under Section 17 of the SARFAESI Act at the stage of possession notice as stipulated under Rules 8(1) and 8(2) of the 2002 Rules.